An article appeared earlier today (2 Oct 2014) in The Conversation and in Business Spectator here in Australia, “Building a new economics for the #Occupy generation” that talked about blaming economists for not predicting and preventing the global financial crisis in 2008 and how economics needs to reinvent itself, etc, etc. In response, I posted the following to Business Spectator …

The causes of the GFC are complex and can hardly be blamed on economists. Quite a few did predict it, but were often criticised by the banking, insurance and business sectors who were making a heap of money with easy credit and relaxed rules and who carried more weight with the regulators than any economists did. But predicting the future can be little more than guesswork. You can base forecasts on the best available data at the time and they can turn out to be wrong.

The article talks about economic or rational man. But people, businesses and governments don’t always behave rationally and perhaps increasingly so in an ever-more complex world. This throws out any forecasts for the future and makes predicting turning points in the economy very hard. A good example is the federal government with its talk of a “budget emergency” and then they go on a spending spree pushing the deficit up from $19 billion in 2012-13 to $48 billion in 2013-14 and it will probably get larger with various extravagant pet programs yet to kick in, little being done on the revenue side, and some overly-optimistic forecasts that look to be politically influenced.

Economics can keep adding new theories and models but it will probably never be able to keep up with irrational behaviour by people, business and government. The last few lines of the article mention the “financial crisis, growing inequality, and looming environmental catastrophe” but these sorts of things have been included in economics for ages. I studied environmental economics in the 1970s before the right even realised there was an environment. There was a survey of 35 economists in November 2013 with 30 opting for carbon pricing, two for direct action and three for something else. But the federal government abolished carbon pricing. This will now cost the budget $18 billion over four years and who knows how many billions as emissions and temperatures keep going up, causing untold damage, including to our coastal cities with an increase in extreme weather and rising sea levels.

Economists can produce all sort of theories and models and suggest things, but it’s hard if governments, business and people behave irrationally, and then who knows what will happen. Added to this are other issues that spring up and we often have no idea of the impact on the wider economy until it happens, e.g. Ukraine, ISIL, Ebola and now Hong Kong. How these things will play out and what effect they will have on the world and Australian economies over the next 12 months is anyone’s guess.

Here in Australia, one of the new senators, Malcolm Roberts, denies anthropogenic global warming. He and/or one of his staff plus a few other deniers have been busy posting odd things refuting AGW on his Facebook page, including various odd explanations and selective bits and pieces, old quotes, etc, to declare that AGW is all a hoax by scientists, scientific organisations and governments around the world. I’ve been picking the deniers to pieces over there but they don’t give up. I posted this comment on his video which he posted to his page a few days ago (although all I get in response is that I’m talking rubbish and more odd comments and selective quotes as the deniers continue to try and support their position) …

This video is misleading and gives totally the wrong impression. Carbon dioxide might be a small percentage of the atmosphere and man-made CO2 a smaller percentage still. But I think he’s mixing up his stocks and flows. He’s right in saying that man-made CO2 is only 3-4% of all CO2 but he seems to be saying that this is the level (stock) of man-made CO2 when in actual fact this is the percentage of man-made CO2 emissions (flow).

The problem is that only about two-fifths of this additional CO2 is absorbed and the rest stays in the atmosphere, building up steadily over time. Roberts seems to forget this. Before the industrial revolution, the CO2 absorption and release sides were pretty much in balance. Since then, we’ve had additional CO2 released by humans in ever-increasing volumes through all our various activities. It may seem small overall but, as I said, it builds steadily over time.

CO2 is now at about 400 parts per million or 0.04% of air as per the video. But over the last 400,000 years and up to the industrial revolution, CO2 varied between about 180 and 280 parts per million, in natural cycles. It was around the top of this cycle at the start of the industrial revolution and is now 40-45% higher at 400 ppm. Normally, it takes 5,000 to 20,000 years to increase by 100 ppm; this time, it has taken perhaps 150 years to increase by 120 ppm. The extra CO2 acts like a blanket, or a thicker blanket, enveloping the earth and keeps the heat in, thus the steadily increasing temperatures. This causes the ice the melt, sea levels to rise and an increase in wilder weather, with increasingly severe storms, larger tidal surges and more coastal flooding, causing damage and displacing people, often in the poorer parts of the world.

He then seems to compare Australia’s CO2 with the world’s total air. His subsequent statistics and analysis are therefore quite flawed.

I’m not sure where his carbon dioxide tax figures come up: $72 billion in five years. This was the estimated cost over this period of an American scheme in the 1990s. Emissions fell when we had carbon pricing in place, they rose before that and have risen again since. Also, getting rid of carbon pricing was estimated by the PBO to cost the budget $18 billion over four years, adding extra pressure to the budget. We now have the useless Direct Action policy.

Roberts says that temperature changes come first and then CO2 levels follow. It actually works both ways. In other words, changes in carbon levels both cause, and result from, changes in temperature. For example, when ocean temperatures rise, more CO2 is released into the atmosphere making the air warmer which means more CO2 is released. We have to also consider the rapid increase in temperatures this time around, much faster than historically. Graphing temperatures and CO2 levels since the 19th century, we can see a very high correlation over this period, which makes sense because the large increase in CO2 acts as a blanket keeping the heat in. To say that nature alone determines CO2 levels not humans, as Roberts states in the video, is simply wrong.

He doesn’t seem to offer any explanation for the increasing temperatures. It can’t be solar activity as that has fallen if anything since the 1970s, nor volcanic eruptions (these are low historically), nor Earth’s orbit (variations and effects on temperature are long term). That leaves greenhouse gases, which includes CO2 which causes up to a quarter of the greenhouse effect. Water vapour has a larger effect but it’s CO2 levels that have easily changed the most. Or does he think scientists use faulty thermometers, or are fudging the numbers?

Here’s what I posted as a comment to Business Spectator and the Conservation sites yesterday. The Coalition is struggling with the budget but don’t seem to have many ideas up their sleeves. Malcolm Turnbull and Scott Morrison have replaced Tony Abbott and Joe Hockey, but this doesn’t seem to have made much difference …

The Coalition has now spent 2.5 years treading water on revenue issues. I’m not sure Morrison and Turnbull have much more of an idea than Hockey and Abbott. If another 2% of voters (i.e. swinging voters) feel this way in the next few months, the government could be in trouble, and remembering that the Coalition only had about 46-48% of the vote under Abbott.

Abbott and Hockey talked of a ‘budget emergency’, which was always nonsense. Then they proceeded to chop taxes and spend a heap on pet projects. That was never going to fix the budget. The measures that would have hit the sick, the poor, the old and the young, but didn’t get through the Senate, would have given the budget some slight short term relief but no good for the economy, or the budget in the longer term.

Morrison still doesn’t seem to think we have a revenue problem. We’ve had a revenue problem since 2008 when the GFC sent revenue through the floor (as it did in countries all around the world), falling from 25-26% of GDP to 21.5% in 2010-11. It still hasn’t recovered (at 23% of GDP), unlike the situation in many countries.

Morrison and Turnbull seemed to be testing the waters on increasing the GST. That didn’t work and they more or less dumped it but not quite, which caused various contradictory statements. Now it’s totally dropped but they don’t seem to have anything else specific. This showed in Morrison’s nothing talk to the Press Club.

There are all sorts of things the government could do but they don’t seem to want to. The government needs to look at things like tax concessions on superannuation, property investment, etc at the high end, corporate tax avoidance and evasion, carbon pricing (its abolition is costing the budget $18 billion over four years according to the Parliamentary Budget Office), etc as well as some expenditure cuts (expenditure is at 26% of GDP; it was 24.9% in 2008-09 to 2012-13 and that was with the stimulus packages to keep us out of recession; mining and China wouldn’t have been nearly enough) before it can reasonably think about income tax cuts. Or they will never come close to a surplus, let alone reducing the debt.

Then there’s bracket creep. Treasury modelling showed the average tax rate would go from 24.4% to 26.6% by 2020-21. Morrison described it as a job killer and growth killer. Theoretically, that would be the case if the money isn’t spent. But it’s a trade-off between growth and reducing the deficits and debt. I’d probably let bracket creep go another couple of years and implement the measures I outline in my previous paragraph. Federal government debt has increased from around $265 billion to $410 billion under the Coalition, or about $5 billion a month, and the deficit is twice what it was in 2012-13.

An increase in the GST [goods and services tax] rate is probably the way to go. When a country raises a large proportion of its taxes from income, as in Australia, it is more susceptible to the ups and downs in the economic cycle. This is because income (and therefore taxes on it) fluctuates more than consumption (and the taxes raised on it). Thus it would probably make sense to increase the proportion of tax on consumption, such as an increase in the GST to 15%. What’s in and what’s out can be discussed. At the same time, we would need to lower tax rates on income, especially at the lower levels, to compensate.

But the net change in tax wouldn’t amount to much. It might be a relatively small increase and we would still be running the large deficits we’ve had ever since the GFC pushed revenue through the floor, and it still hasn’t recovered. Practically every government (left, right and centre) in the world ran deficits at the time of the GFC to keep their economies out of recession or in many cases to ease the severity of an inevitable recession.

The Coalition is now pushing the federal government debt up by $5 billion a month because they have reduced taxes and increased expenditure. Expenditure by the Coalition will average 25.6% of GDP in 2014-15 to 2018-19 compared with Labor’s average of 24.9% in 2008-09 to 2012-13 and that period included the GFC and stimulus packages to keep us out of recession. But fundamentally, it remains a revenue problem rather than an expenditure one. The Coalition has pushed the federal government debt up from $265 billion to $380 billion in 23 months. At that rate, the debt will be around $900 billion by 2023-24.

The problem started in the early and mid 2000s with endless tax cuts and high expenditure with the government not putting much away for a rainy day. The previous Coalition government was wasteful according to a 2013 IMF report using data to 2011 that found the Australian government “profligate” in 2003, 2005, 2006 and 2007 (and 1942 and 1960). Also, public service numbers increased by 40,000 from 2000 to 2007 compared with 5000 between 2008 and 2013.

In order to fix the problems that the previous and current Coalition governments have given us, we will need to do much more than fiddle with GST. We would still need to look at the overly generous tax concessions on property investment and superannuation. Tax concessions amount to about $120 billion a year or 8% of GDP, far higher than comparable countries.

We would also need to look at some form of carbon pricing rather than the expensive and ineffective Direct Action which has pushed emissions back up after we saw a fall during the time of the carbon tax. Getting rid of carbon pricing will cost the budget $18 billion over four years according to the Parliamentary Budget Office or about $800 a person.

Land tax is another option that should be discussed.

We might also need to abolish the states and save $50 billion a year according to a 2007 estimate in a PhD study by Dr Mark Drummond. At the moment we have eight systems (six states and two territories) all basically doing the same thing, which the federal government (one system) could do, rather than all the current inefficiencies, overlapping and fighting.

But the problem at the moment is that we have a federal government that wants a “mature” debate on tax but has ruled out most areas of potential reform, or has placed various conditions such as with any changes to the GST making agreement unlikely. They will probably just keep on playing the blame game like kids. There will be plenty of talk but in the end nothing much will be done.

A Morgan poll in July had Turnbull as preferred Liberal Party leader by 44% of people (up 6% from April). Bishop had 15% of the vote (down 12%). Abbott was on just 13% (up 1%). Coalition voters had Turnbull at 32% (up 2%), Abbott 26% (up 1%), Bishop 16% (down 9%), Morrison 13% (up 5%), Hockey 4% (unchanged). Turnbull would perhaps be the Coalition’s only chance of a second term, given it would need to convince a lot of swinging voters to change their minds.

Labor would obviously prefer Abbott to remain and it seems there’s a good chance the Coalition might be silly enough to oblige. They’ve painted themselves into a corner on this after endlessly criticising Labor’s leadership changes, although the Coalition had four leaders in two years: Howard, Nelson, Turnbull, Abbott. But the Coalition paints itself into various corners criticising Labor and then does a worse job themselves. The budget is a good example. But they still carry on like vengeful schoolkids blaming everyone and everything for their problems but themselves.

You would think something has to give. The latest Morgan poll is at 57:43 in favour of Labor. The poll is much larger than the others and includes people who only use a mobile phone. It’s hard to see this improving with the Coalition’s efforts on marriage equality and climate change.

A number of polls have shown that support for marriage equality is 68-72%, yet the Coalition (read Abbott) has decided to draw the issue out for years, ensuring plenty of internal bickering, and then perhaps have a referendum at a cost of $150 million to find out something we already know: that support for marriage equality is high.

On climate change, they’ve gone with a weak emissions reduction target and prefer non-renewables.But the Climate of the Nation 2015 survey found that 84% of people had solar in their top three preferred energy sources, followed by wind with 69%, gas 21%, nuclear 13% and Abbott’s coal 13%. The same survey found that more than three-quarters of people felt the polluters should pay, not the taxpayers. But carbon pricing is gone and we now have the expensive, ineffective Direct Action policy where the taxpayer pays. The Parliamentary Budget Office estimated the cost to the budget of abolishing carbon pricing to be $18 billion over four years. Surveys have shown that people (and especially economists) prefer carbon pricing to Direct Action.

Then there’s the Dyson Heydon saga.

How many nails do you need in a coffin? It’s quite possible Abbott and the Coalition will think of some more.

Comment by Andrew: “good summary Chrispy”

Comment by Rich: “Thank you for the BEST REASONED, FACT-BASED ANALYSIS I’ve seen ANYWHERE about the current malaise in our Federal political situation!!”

Thanks guys. Yes, it really is a malaise that surely can’t continue medium or long term. Will be interesting to see what happens. Anyone’s guess really. Perhaps the only safe bet is that Tony Abbott won’t be there long term.